LLCs With Separate “Series”
LLCs with separate “series” of assets are becoming the latest tool for structuring transactions.
At least seven US states have limited liability company statutes that allow limited liability companies to create different pockets or cells of investments, each potentially with different owners, a different managing member and different assets. In three of the seven states, each series can have a separate right, in its own name, to sign contracts, hold title to assets and grant liens and security interests in the assets belonging to that series. The debts of a particular series may be enforceable only against the assets of that series.
The structure opens a number of possibilities. For example, wind companies that build out projects in 100- or 200-megawatt increments using a single interconnection agreement may have trouble getting consent from the utility to divide up the interconnection rights among separate project companies. If a series LLC were used, then the interconnection agreement could remain in the name of a single LLC.
In early January, the tax section of the American Bar Association asked the IRS to allow each separate series to be treated as a separate entity for tax purposes. Therefore, some could be treated as separate partnerships at the same time that the parties might choose to treat others as corporations. The IRS is working on guidance that it has set an internal deadline to issue by June.
Last year, the IRS issued a revenue ruling about a “protected cell company” that was a lot like a series LLC. A “sponsor” formed a master entity. The master entity had two separate cells underneath it. The sponsor owned all the common stock associated with each cell, but company X owned the preferred stock in cell X and company Y owned the preferred stock in cell Y. Each cell insured certain risks of its preferred shareholder. The preferred shareholder paid a “premium” for the insurance. The ruling addressed whether the purported insurance was really insurance so that the premiums could be deducted, or whether they were something else so that what the preferred shareholder called a premium was really a capital contribution or deposit.
A contract between a parent and a wholly-owned subsidiary is not normally insurance. The IRS found in the case of one of the cells that the arrangement was not insurance because there was no shifting or spreading of risk among a large number of parties. The contracts written by the second cell were insurance because risks were spread among a dozen professional service companies that were subsidiaries of the preferred shareholder in cell Y. The ruling is Rev. Rul. 2008-8.
A few weeks later, the IRS suggested in Notice 2008-19 that it would treat each cell as a separate entity for tax purposes as long as the assets and liabilities of the cell are segregated from the assets and liabilities of each other cell and of the master company.
The IRS asked for comments on how to treat similar segregated arrangements that do not involve insurance. The segregated arrangements have many names: protected cell companies, series LLCs, segregated account companies and segregated portfolio companies.